Presentation Transcript

1. CHAPTER 13: INVESTING INMUTUAL FUNDS

2. Mutual Fund Basics Financial services organization that receives money from shareholders and invests it on their behalf Investors become part owners in a securities portfolio More people invest in mutual funds than any other financial product
3. Mutual Fund Basics INVESTORS pool their money and
4. ABC XYZ MUTUAL FUND Mutual Fund Basics INVESTORS pool their money and buy shares in the MUTUAL FUND.
5. ABC XYZ MUTUAL FUND Mutual Fund Basics INVESTORS pool their money and buy shares in the MUTUAL FUND. FUND MANAGER selects and purchases a variety of investment instruments.
6. The Mutual Fund Concept
7. Why Are Mutual Funds So Popular? Offer a variety of interesting investment opportunities. Offer a wide array of services that many investors find appealing. Provide an easy and convenient way to invest Are especially suited to beginning investors and those with limited investment capital. There are more mutual funds in existence today than there are stocks listed on the New York and American exchanges combined!
8. Advantages of Mutual Funds: Diversification—risk is lowered; one share buys a slice of everything in the fund. Professional management—pay someone who is knowledgeable to make investing decisions. Financial returns—relatively attractive returns over the long term. Convenience—easy in & out, small outlays, help with record keeping.
9. Disadvantages of Mutual Funds: No choice in securities selection— if you don’t agree with choices, you must change funds. No control over sale of securities within fund—timing of sales has tax implications for investor.
10. How Mutual Funds are Organized: Each fund is a separate corporation or trust and is owned by the shareholders. Other main players include: Management company—creates fund; runs the daily operations Investment advisor—oversees portfolio. Distributor—sells fund shares. Custodian—independent party; physically safeguards fund’s assets. Transfer agent—executes transactions and maintains shareholder records.
11. How Safe is Mutual Fund? Separation of duties protects investor/shareholder from fraud Chance of losing money from fraud or a fund collapse is almost nonexistent Fund’s assets can never be in the hands of the management company Board of Directors keeps tabs on management company
12. Types of Investment Companies: Open-End Investment Companies (mutual funds) Dominant type of investment company Shares purchased from and sold back to company. Shares are not traded among individual investors. New shares issued as money flows in. NAV is usually the quoted price.
13. Net Asset Value (NAV) Current value of all securities held in fund’s portfolio. Open-end funds buy back their own shares at NAV. NAV = Current market price of all fund assets (Less any liabilities) Divided by the number of outstanding shares
14. Closed-End Investment Companies Operate with a fixed number of shares outstanding. All trading is done between investors on the open market. Shares frequently trade at a discount or premium to net asset value.
15. Exchange-Traded Funds Type of mutual fund that trades as a listed security on one of the stock exchanges (like closed-end funds). Typically structured as index funds. Spiders based on S&P 500 Diamonds based DJIA Qubes based on Nasdaq 100 Numbers of shares outstanding can be increased or decreased, depending on demand, like open-end funds.
16. Mutual Fund Cost Considerations: Loads = sales commissions Front-end load funds (or simply "load funds") charge a commission when shares are purchased. Low-load funds hold commissions to 2–3% when shares are purchased. Back-end load funds charge a commission when shares are sold.
17. No-Load Funds—no fee to purchase or redeem shares and low or no 12(b)-1 fees. 12(b)-1 Fees—also known as hidden loads; annual fees for marketing and promotion. Management Fees—annual fees charged by all funds to pay the fund manager.
18. Maximum allowable fees: Total sales charges and fees cannot exceed 8 1/2%. Of this amount, 12(b)-1 fees cannot exceed 1%. Funds cannot call themselves “no-load” if their 12(b)-1 fees exceed 0.25%.
19. Keep Track of Fees! Funds are required to disclose all fees in their prospectus. Even no-load funds can have high annual expense ratios and/or 0.25% 12(b)-1 fees. Fees affect your return, and annual fees will be collected regardless of the performance of the fund.
20. Types of Funds Growth Aggressive Growth Value Equity-Income Balanced Growth & Income Bond Money Market Index Sector Socially Responsible International Asset Allocation
21. Growth Funds Long-term growth and capital gains are the primary goals. Invest principally in common stock with above-average growth potential. Involves a fair amount of risk. Usually viewed as long-term investment vehicles. Most suitable for the more aggressive investor.
22. Aggressive Growth Funds Highly speculative investment vehicles. Seek large profits from capital gains. Also known as “capital appreciation” funds. Most volatile of all the fund types.
23. Value Funds Confine their investing to stocks considered to be undervalued by the market. Look for stocks that are fundamentally sound but have yet to be discovered Fund managers uncover value (investment opportunities) before the rest of the market does. Less risky than growth investing.
24. Equity-Income Funds Emphasize current income. Primarily invest in high-yielding common stocks. Capital preservation and capital gains are also goals but not primary objective. Tend to hold higher-quality securities that are subject to less price volatility. Fairly low-risk way of investing in stocks.
25. Balanced Funds Tend to hold a balanced portfolio of stocks and bonds. Purpose is to generate a well-balanced return of current income and long-term capital gains. Bonds (25-50% of portfolio) are used to provide current income; stocks are selected for long-term growth Invest in high-grade securities Considered a relatively safe form of investing.
26. Growth-And-Income Funds Seek a balanced return of current income and long-term capital gains. Put most of their money into equities—as much as 80-90% in common stock. Invest in high-quality issues—growth-oriented blue-chip stocks and income stocks. Involve a fair amount of risk. Most suitable for investors who can tolerate risk and price volatility.
27. Bond Funds Invest in various kinds of fixed-income securities. Income is primary objective. Generally more liquid. Offer a cost-effective way of achieving high degree of diversification. Automatically reinvest interest and other income (allows investor to earn fully compounded rates of return). Usually considered fairly conservative.
28. Money Market Mutual Funds Highly liquid investment vehicles. Very low risk because they’re immune to capital loss. Returns are subject to ups and downs of market interest rates. Types: General-purpose money funds –invests in any type of short-term investment (from T-bills to corporate commercial paper and bank certificates) if it offers attractive rate of return. Tax-exempt money fund – limits investments to tax-exempt municipal securities with short maturities. Government securities money fund – limits investments to short-term securities of the U.S. government and its agencies.
29. Index Funds Buys and holds a portfolio of stocks (or bonds) equivalent to those in a market index like S&P 500. Holds the same stocks that are held in index and in same proportion. Simply try to match the market. Low-cost investment management (run almost entirely by a computer). Produce highly-competitive returns. Outperforms vast majority of all other types of stock funds.
30. Sector Funds Restrict investments to a particular sector of the market. For example, healthcare sector fund would confine investments to drug companies, medical suppliers, biotech concerns, etc. Underlying investment objective is capital gains. Similar to growth funds; should be considered speculative in nature.
31. Socially Responsible Funds Actively and directly incorporate morality and ethics into the investment decision. Will consider only socially responsible companies for inclusion in their portfolios. Abstain from investing in tobacco, alcohol, gambling; weapons contractors, nuclear power plants. Lower average returns.
32. International Funds Two types International funds - invests exclusively in foreign securities Global funds – invests in both foreign and U.S. companies Capitalize on changing foreign market conditions Position themselves to benefit from devaluation of the dollar. Fairly-high risk investments.
33. Asset Allocation Funds Spread investors’ money across all different types of markets. Fund manager selects individual securities and makes strategic decisions on how to allocate the money among various markets. As market conditions change over time, the asset allocation will change as well.
34. Services Offered by Mutual Funds: Automatic Investment Plan—mutual fund periodically drafts money from investor's bank account. Automatic Reinvestment Plan—fund earnings and distributions automatically reinvested in additional shares of fund. Regular Income—fund automatically pays out to investor predetermined amount periodically.
35. Reinvestment
36. Conversion Privileges—allow shareholders to easily move from one fund to another within the fund family. Retirement Plans—funds set up and administer retirement plans for self-employed individuals.
37. Making Mutual Fund Investments Selecting a Mutual Fund: Match the fund's objectives with your investment objectives. To accumulate capital To speculate in hopes of generating high rates of return To conserve or preserve your capital Consider your tolerance for risk and your investment time horizon. Read the prospectus!
38. Assess the fund's services. Check the fees charged. Consider the fund's longer-term returns as well as its shorter-term returns.
39. How to Select A Mutual Fund
40. Mutual Fund Performance: Returns consist of : 1) dividend/interest income earned by the fund assets; 2) realized capital gains distributions from sale of assets within the fund; 3) change in mutual fund's share price. Past performance reveals success of fund managers but does not guarantee future returns! Stick with No Loads or Low Loads– load funds that produce superior returns are the exception rather than the rule.
41. Some Mutual Fund Facts Every Investor Should Know • Stock funds that get hit hard in market crashes aren’t necessarily bad investments. • Even great funds have bad years now and then. • Most stock (and bond) funds fail to beat the market. • You don’t need a broker to buy mutual funds. • A fund that doesn’t charge a sales commission isn’t necessarily a no-load fund. • If you own more than a dozen different funds, you probably own too many. • Mutual fund names are often misleading. • Bond funds with high yields don’t necessarily produce high returns. • Money market funds are not risk-free (you never know what kind of return you’re going to earn with these things). • If the market crashes, it will probably be too late to sell your fund shares (the damage likely will already have been done). • Even bad funds sometimes rank as top performers.
42. Measuring Fund Performance The return on a mutual fund is made up of (1) the (net) investment income the fund earns from dividends and interest and (2) the realized and unrealized capital gains the fund earns on its security transactions. Mutual funds provide such information to their shareholders in a standardized format that highlights key income, expense, capital gains information, and others.
43. Future Performance Consider the future direction of the market as a whole Take a good look at the past performance of the mutual fund.
44. Investing in Real Estate Investing in real estate provides greater diversification properties than does holding just stocks or bonds. Typically exhibits less volatility than stocks, and it doesn’t move in tandem with stocks.
45. Basic Considerations of Investing in Real Estate Cash flow and taxes Depreciation write-offs reduce taxes Passive investment Appreciation in value Use of leverage Using borrowed money to magnify returns
46. Using Leverage in Real Estate Investments
47. Investing in Income Property Commercial property Residential property Single-family homes
48. Speculating in Raw Land Highly risky Investors hope the property will undergo dramatic increases in value Often purchased by land speculators
49. Real Estate Investment Trusts (REITs) Closed-end investment companies whose trust assets are limited to real estate investments. Enable investors to receive both the capital appreciation and the current income from real estate ownership without headache of property management. Offer a more diverse and marketable way to invest in real estate. Equity or property REITs invest in properties; mortgage REITs invest in mortgages; hybrid REITs invest in both.
50. THE END!